The equity market has turned in a strong performance so far this earnings season. From the day before Alcoa’s release to yesterday’s close, the SPDR S&P 500 ETF (SPY - ETF report) is up just short of 3.6%. Benchmarking SPY’s historical performance to Alcoa earnings release, the S&P 500 has traded strongly relative to the 5, 10, and 15 year averages.
Although the market has started the earnings season on a bullish note, historically it has started to find headwinds somewhere between 8 and 10 days after Alcoa’s release. Performance has been stronger in recent years than the past. Traders have a lot to think about in the last half of July given the cocktail of news.
The economy seems to be lifting:
At the macro level, the economy seems to be finding firmer footing. Both the Empire and Philly manufacturing surveys displayed strength rising 1.62 to 9.46 and 7.30 to 19.8 respectively. The Philly reading was the highest since the spring of 2011. At the same time the average of the two employment indices rose to 5.48 up from -2.7 in June, displaying improved labor demand in the manufacturing sector. The average was the best since July 2012 (6.91). Moreover, unemployment claims were a low 334,000 in the BLS payroll survey week, and the July NAHB survey surged 6 to a new cycle high 57.
Corporate news has something for bulls and bears:
At the corporate level, news flow has been mixed in the recent days. Microsoft (MSFT), Intel (INTC), Google (GOOG ), and eBay (EBAY) have disappointed investors, but financials have been a positive given results from Goldman Sachs (GS), Morgan Stanley (MS), JP Morgan (JPM), Wells Fargo (WFC), and Citigroup (C). Industrial like General Electric (GE), Ingersoll Rand (IR), and Honeywell (HON) look to have posted positive earnings for the quarter.
Investors like the market:
Turning to sentiment, investors have embraced the market. Lipper reported that all equity funds saw an inflow of $16.6 bln in the week ending July 17 after an $11.8 bln inflow the week prior. The American Association Individual Investors’ Sentiment Survey displayed optimism with the spread between the bull and bear indices over 20 for a second week. In the options market, the CBOE’s Composite Put to call ratio fell to a low 0.74 Thursday suggesting investors are getting more comfortable with the rally.
My questions for you:
Is profit news and signs of an improved macro backdrop strong enough to power stocks higher into the end of July?
Is sentiment building to a level which signals a short term overbought condition?
I’d love to hear your thoughts!